Hvordan ble Irlands boligboble drevet frem til den til slutt sprakk i 2007, og kan det samme skje i Norge? Vi gjør en faktasjekk på situasjonen, og ser på hvor trolig det er at en boble vil oppstå her hjemme. Spoiler- ikke så sannsynlig.
written by: Nikkita Dixon
Here’s what a property bubble really looks like
If it was easy to spot a bubble, they probably wouldn’t happen. And sometimes predicting a market crash can end up being the catalyst for exactly that. It’s a delicate balance and one that relies on voices of reason among the economic pessimists. Yet as house prices continue their slow decline in Norway it’s hard to ignore the steady beat of the prophets of doom. But is there cause for concern? Could housing prices fall just as fast as they’ve risen over the past decade? Or is the Norwegian property bubble really all just a myth?
Sometimes to make sense of the future it helps to look back on the failures of the past. And if we’re looking for a case study of what not to do, the Irish property bubble of 2007 certainly springs to mind. While pinning Ireland against Norway is a little like comparing apples and oranges, let’s look at what a real property bubble looks like and how it stacks up to current market conditions.
What caused the Irish property bubble?
The years between 1995 and 2007 were awash with colourful advertisements, glossy newspaper supplements and banners encouraging people to ‘live the dream’ and ‘get on the property ladder’ – whether they could afford it or not. The overarching message being that once you got a foot on the rung it would only be a matter of time before your bricks and mortar started to increase in value. This resulted in record levels of housing construction in Ireland as well as a sharp acceleration in the pace of credit expansion.
For a while things were going pretty well. House prices were swelling and there was an unprecedented increase in immigration to Ireland. Between 1996 and 2006 the country’s population rose by 20% (800,000 people). Property prices more than doubled between 2000 and 2006, jumping 17% between May 2000 and May 2001 alone. As housing density figures skyrocketed, roughly 75,000 houses were being built every year to hit a government-imposed target of 460,000 by the end of 2005.
Bizarrely the huge increase in the supply of homes did nothing to lower prices and by 2007 the average house price had ballooned to 11 times people’s average income. Despite this, the house- buying frenzy continued with low interest rates encouraging buyers to borrow larger amounts of money. This was compounded by reckless lending practices by financial institutions that had little regulatory supervision. Somehow, 100% mortgages stretching over 25 to 35 years became the norm. Meanwhile the Central Bank quietly admitted the residential property market was overvaluated by 20-60%.
Eventually, with the onset of the world-wide recession, investors saw the risk premium as being too great and demand started to wane. Once home-buyers realised the value of their home could actually go down, house prices started to tumble, triggering a mass sell-off of property at dwindling market value.
As predicted in earlier reports dating from 2006 and 2007, a property price crash hit Ireland by the first half of 2009. As prices plunged, people found themselves paying off huge mortgages for properties worth a fraction of the money they would be required to repay. By June 2009 roughly 40% of the price growth from the bubble years had been lost. And by the end of 2010, one in three mortgages was found to be in negative equity.
Construction ground to a halt, meaning 12% of the population working in construction were facing rapidly decreasing employment opportunities. Unemployment leapt to 14.3% by 2011. Meanwhile 216,533 houses remained empty, according to the 2006 census (excluding the 49,789 houses which were described as holiday homes).
Worst of all, the Irish banking system was brought to the brink of collapse. Emergency measures cost taxpayers €64 billion or €16,000 for every man, woman and child living in the Republic of Ireland.
Could Norway meet a similar fate?
It’s hard to equate the Norwegian housing climate to others that have experienced a bubble, but we can draw some comparisons. The country’s household debt ratio which has slowly crept to 230% seems to be one of the biggest factors fuelling bubble concerns (Ireland’s debt levels rose to similar levels in the leadup to, and in the years following the market crash). However Norway’s largest financial services group, DNB, has sought to dismiss these concerns by citing the following:
- Norway has good welfare systems that provide higher tolerance for high debt.
- In countries where a large proportion of households own their own property (as in Norway), the average debt ratio will naturally be higher than in countries where a larger proportion of housing leases.
- Norway has a high tax level, which results in lower disposable income and thus an easier high debt ratio (debt as a share of disposable income).
- Households have low interest rates. Interest expense as a share of disposable income (interest burden) has risen somewhat over the past three years and last year was close to the average for the last 20 years (8 per cent).
- In Denmark and the Netherlands, households have significantly higher debt ratesAnother point for comparison is the ability for investors to actually pay off the loans. Prospective buyers during Ireland’s bubble years were awarded loans at a ratio of 11:1 on their average income, largely due to the irresponsibility of financial institutions. The Norwegian government has already put a pin in this in its attempt to curb the market by imposing restrictions on banks’ mortgage lending. From 2017, borrowing will be capped at less than five times a householder’s income and mortgages will run over a shorter period of time.Furthermore, the biggest thing fuelling the building frenzy during Ireland’s bubble years were the many government-driven tax incentives made available for property developers. By and large housing in Ireland was seen as a way of making money rather than fundamentally as a way of providing homes and shelter for the citizenry. The 1981 Finance Act included incentives which provided tax relief for the capital expenditure incurred in the construction, refurbishment or conversion of rented residential accommodation. It allowed investors to write off all but the site costs of an apartment or town house against their total rental income in the first year, including rents from other properties owned, with any unused tax relief being carried forward indefinitely. In most cases, these incentives meant that the capital cost of qualifying new developments could be written off against an investor’s tax liability over a 10-year period.
It was a climate that saw investors snapping up properties as soon as developments were announced with no intention of ever living in them. Rather they planned to sell them on for a profit as soon as the build was complete since prices were rising so quickly. When the market bottomed out, the houses were left empty – 198,000 in fact, which is 13% of the total housing stock and twice as many as a normal market.
In contrast, Norway’s housing boom is only partly driven by speculation, with the overwhelming majority of the houses and apartments bought for the personal use of the buyers or their children. Even the rental market is dominated by small owners. The Norwegian tax system strongly encourages this by giving large tax breaks to those who buy and own their own home, while taxing those who run property as a business.
Most importantly, the downturn in housing prices in Norway is currently being driven by the government’s tightened lending criteria, as opposed to the global financial crisis which underpinned the bubble burst in Ireland. If we put aside the bubble narrative, chances are Norway will be in for a smooth landing.
photo: Claire Tardy